This bug report gave me the idea, I tried it just now with Ubuntu Natty
32-bit desktop on a persistent USB install, and I can confirm that it
works. Nice one! Now I have a killer USB stick.

The only thing I am unsure about is that I can't think of a way to check
within the persistence file whether the home directory for the added
user is encrypted. I am able to log in as both users so long as I have
the login screen enabled and automatic login disabled in the login
preferences.

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https://bugs.launchpad.net/bugs/563907

Title:
  Persistent Live USB Install Encrypted Home Folder Login Crash

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